Analyzing the External Environment of the Firm (36 Q&A)

Strategic Management Analyzing the External Environment of the Firm: Creating Competitive Advantages 1) Environmental scanning and competitor intelligence provide important inputs for forecasting activities. Answer: TRUE Explanation: Three important processes (scanning, monitoring, and gathering competitive intelligence) are used to develop forecasts. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 2) Perceptual acuity, according to Ram Charan, is the ability to know for certain what will happen in the future. Answer: FALSE Explanation: Ram Charan defines perceptual acuity as the ability to sense what is coming before the fog clears. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 3) Ted Turner saw the potential of 24-hour news before anyone else. This is an example of perceptual acuity. Answer: TRUE Explanation: Ram Charan defines perceptual acuity as the ability to sense what is coming before the fog clears. Turner saw the potential of 24-hour news before anyone else did. All the ingredients were there, but no others connected them until he created CNN. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 4) Environmental monitoring deals with tracking changes in environmental trends that are often uncovered during the environmental scanning process. Answer: TRUE Explanation: Environmental monitoring tracks the evolution of environmental trends, sequences of events, or streams of activities. Difficulty: 1 Easy Topic: Understanding a Firm's External Environment Learning Objective: 02-02 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5) Competitive Intelligence (CI) is a tool that can provide management with early warnings about both threats and opportunities. Answer: TRUE Explanation: Competitive intelligence (CI) helps firms define and understand their industry and identify strengths and weaknesses of rivals. Done properly, competitive intelligence helps a company avoid surprises by anticipating competitor moves and decreasing response time. Difficulty: 1 Easy Topic: Understanding a Firm's External Environment Learning Objective: 02-02 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 6) Competitive intelligence generally does not benefit very much from gathering information on competitors from sources in the public domain. Answer: FALSE Explanation: Competitive intelligence is frequently done effectively through public sources of information. Examples are evident in daily newspapers and periodicals such as The Wall Street Journal, Bloomberg Businessweek, and Fortune. For example, banks continually track home loan, auto loan, and certificate of deposit (CD) interest rates charged by rivals. Major airlines change hundreds of fares daily in response to competitor tactics. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-02 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 7) Even with all the advances in recent years, forecasting is typically considered more of an art than a science and it is of little use in generating accurate predictions. Answer: FALSE Explanation: Environmental forecasting involves the development of plausible projections about the direction, scope, speed, and intensity of environmental change. Its purpose is to predict change. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-02 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 8) Scenario analysis is a superficial approach to forecasting that seeks to explore possible developments that many only be connected to the past. Answer: FALSE Explanation: Scenario analysis is a more in-depth approach to forecasting. It draws on a range of disciplines and interests, among them economics, psychology, sociology, and demographics. It does not rely on extrapolation of historical trends. Rather, it seeks to explore possible developments that may only be connected to the past. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-03 Why scenario planning is a useful technique for firms competing in industries characterized by unpredictability and change. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 9) SWOT analysis is useful in part because it obliges the firm to act proactively by putting an emphasis on identifying opportunities and threats that constrain the action choices a firm might make because of its internal and external environmental scan. Answer: TRUE Explanation: Despite its apparent simplicity, the SWOT approach has been very popular. First, it forces managers to consider both internal and external factors simultaneously. Second, its emphasis on identifying opportunities and threats makes firms act proactively rather than reactively. Third, it raises awareness about the role of strategy in creating a match between the environmental conditions and the internal strengths and weaknesses of the firm. Difficulty: 2 Medium Topic: SWOT Analysis Learning Objective: 02-03 Why scenario planning is a useful technique for firms competing in industries characterized by unpredictability and change. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 10) In the SWOT framework, the Strengths and Weaknesses are external environmental factors to consider. Answer: FALSE Explanation: The Strengths and Weaknesses refer to the internal conditions of the firm in which a firm excels (strengths) and where it may be lacking relative to competitors (weaknesses). Difficulty: 2 Medium Topic: SWOT Analysis Learning Objective: 02-03 Why scenario planning is a useful technique for firms competing in industries characterized by unpredictability and change. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 11) In the SWOT framework, Opportunities and Threats are environmental conditions internal to the firm. Answer: FALSE Explanation: Opportunities and Threats are environmental conditions external to the firm. These could be factors in either the general or the competitive environment. Difficulty: 2 Medium Topic: SWOT Analysis Learning Objective: 02-03 Why scenario planning is a useful technique for firms competing in industries characterized by unpredictability and change. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 12) Although changes in the general environment may often adversely or favorably impact a firm, they seldom alter an entire industry. Answer: FALSE Explanation: The general environment is composed of factors that can have dramatic effects on firm strategy. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-04 The impact of the general environment on a firm's strategies and performance. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 13) A major sociocultural trend in the United States is the increased number of women in the workforce that has increased the need for business clothing but decreased the demand for baking product staples. Answer: TRUE Explanation: The increased number of women in the workforce has increased the need for business-clothing merchandise but decreased the demand for baking product staples (because people would have less time to cook from scratch). Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-04 The impact of the general environment on a firm's strategies and performance. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14) Technological innovations can create entirely new industries and alter the boundaries of industries. Answer: TRUE Explanation: Developments in technology lead to new products and services and improve how they are produced and delivered to the end user. Innovations can create entirely new industries and alter the boundaries of existing industries. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-04 The impact of the general environment on a firm's strategies and performance. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 15) The Porter five-forces model is designed to help us understand how social attitudes and cultural values impact U.S. businesses. Answer: FALSE Explanation: The five-forces model developed by Michael E. Porter has been the most commonly used analytical tool for examining the competitive environment. It describes the competitive environment in terms of five basic competitive forces. Difficulty: 2 Medium Topic: Five Forces Model of Industry Attractiveness Learning Objective: 02-05 How forces in the competitive environment can affect profitability, and how a firm can improve its competitive position by increasing its power vis-à-vis these forces. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 16) The five-forces model helps to determine both the nature of competition in an industry and the profit potential for the industry. Answer: TRUE Explanation: The five-forces model developed by Michael E. Porter describes the competitive environment in terms of five basic competitive forces that affect the ability of a firm to compete in a given market. Together, they determine the profit potential for a particular industry. Difficulty: 2 Medium Topic: Five Forces Model of Industry Attractiveness Learning Objective: 02-05 How forces in the competitive environment can affect profitability, and how a firm can improve its competitive position by increasing its power vis-à-vis these forces. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 17) In some industries, low switching costs can act as an important barrier to entry. Answer: FALSE Explanation: A barrier to entry is created by the existence of one-time costs that the buyer faces when switching from one supplier product or service to another. Difficulty: 2 Medium Topic: Five Forces Model of Industry Attractiveness Learning Objective: 02-05 How forces in the competitive environment can affect profitability, and how a firm can improve its competitive position by increasing its power vis-à-vis these forces. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 18) In most industries, new entrants will not be a threat because the Internet lowers entry barriers. Answer: FALSE Explanation: In most industries, the threat of new entrants has increased because digital and Internet-based technologies lower barriers to entry. For example, businesses that reach customers primarily through the Internet may enjoy savings on other traditional expenses such as office rent, sales-force salaries, printing, and postage. This may encourage more entrants who, because of the lower start-up expenses, see an opportunity to capture market share by offering a product or performing a service more efficiently than existing competitors. Thus, a new cyber entrant can use the savings provided by the Internet to charge lower prices and compete on price despite the incumbent's scale advantages. Difficulty: 2 Medium Topic: Five Forces Model of Industry Attractiveness Learning Objective: 02-06 How the Internet and digitally based capabilities are affecting the five competitive forces and industry profitability. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 19) The Internet and digital technologies suppress the bargaining power of buyers by providing them with more information to make buying decisions. Answer: FALSE Explanation: The Internet and wireless technologies may increase buyer power by providing consumers with more information to make buying decisions and by lowering switching costs. Difficulty: 2 Medium Topic: Five Forces Model of Industry Attractiveness Learning Objective: 02-06 How the Internet and digitally based capabilities are affecting the five competitive forces and industry profitability. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 20) Reintermediation is responsible for an overall reduction in business opportunities. Answer: FALSE Explanation: Just as the Internet is eliminating some business functions, it is creating an opening for new functions. These new activities are entering the value chain by a process known as reintermediation. Difficulty: 2 Medium Topic: Five Forces Model of Industry Attractiveness Learning Objective: 02-06 How the Internet and digitally based capabilities are affecting the five competitive forces and industry profitability. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21) Two of the key inputs to developing forecasts discussed in the text are A) environmental scanning and stakeholder identification. B) assessing internal strengths and environmental scanning. C) environmental scanning and competitive intelligence. D) environmental scanning and a SWOT analysis. Answer: C Explanation: Three important processes (scanning, monitoring, and gathering competitive intelligence) are used to develop forecasts. Difficulty: 1 Easy Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 22) Salemi Industries launched Cell Zone unsuccessfully in 2005 because it did not understand the market demand for its new product. This is an example of A) vision statement evaluation. B) assessing internal strengths. C) environmental scanning. D) mission statement evaluation. Answer: C Explanation: Analyzing the external environment is a critical step in recognizing and understanding the opportunities and threats that organizations face. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 23) Environmental analysis requires continual questioning of all these assumptions except A) a priori ideas about the structure of the relevant industry. B) continual updating of environmental knowledge. C) presuppositions about who is and is not a competitor. D) biases about how to make money in the industry. Answer: B Explanation: According to Hamel and Prahalad, every manager carries around in his or her head a set of biases, assumptions, and presuppositions about the structure of the relevant industry, about how one makes money in the industry, about who the competition is and is not, about who the customers are and are not, and so on. Environmental analysis requires you to continually question such assumptions. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 24) Firms that were successful in the past can fail today because A) they keep pace with changes in the nature of competition. B) the company strategy is outdated. C) their financial situation is resilient. D) management monitors the relevant environmental factors regularly. Answer: B Explanation: The strategy of the firm may be good at one point in time, but it may go astray when the management frame of reference gets out of touch with the realities of the actual business situation. This situation results when management assumptions, premises, or beliefs are incorrect or when internal inconsistencies among them render the overall theory of the business invalid. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 25) Which one of the following statements is an example of how to improve perceptual acuity? A) A CEO meets with other CEOs of non-competing companies to examine the world from multiple perspectives and then shares the results with his own management team. B) A CEO meets with the company management team regularly to analyze current world events and their potential impact on the company. C) A CEO meets with direct competitors to analyze current industry trends. The CEOs share their conclusions with their respective companies. D) Outsiders are brought in to the board meeting to critique the company strategy, which considers the new information in its potential revamping of the strategy. Answer: C Explanation: Although many CEOs may complain that the top job is a lonely one, they cannot do it effectively by sitting alone in their office. Instead, high-performing CEOs are constantly meeting with people and searching out information. Difficulty: 3 Hard Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 26) Perceptual acuity requires all the following except A) an ability to sense what is coming. B) the ability to detect early warning signals of environmental changes. C) a refusal to consult with others. D) a strong commitment to external environmental monitoring. Answer: C Explanation: The best CEOs are compulsively tuned to the external environment and seem to have a sixth sense that picks up anomalies and detects early warning signals which may represent key threats or opportunities. Although many CEOs may complain that the top job is a lonely one, they cannot do it effectively by sitting alone in their office. Instead, high-performing CEOs are constantly meeting with people and searching out information. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 27) Two non-competing global firms meet quarterly to discuss multiple perspectives on world trends. This is an example of how to improve A) stakeholder management. B) perceptual acuity. C) internal scanning. D) financial returns. Answer: B Explanation: Although many CEOs may complain that the top job is a lonely one, they cannot do it effectively by sitting alone in their office. Instead, high-performing CEOs are constantly meeting with people and searching out information. This helps them improve perceptual acuity. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 28) Which of the following is not an input process to develop forecasts? A) environmental scanning B) competitor intelligence C) stakeholder management D) environmental monitoring Answer: C Explanation: Three important processes (scanning, monitoring, and gathering competitive intelligence) are used to develop forecasts. Difficulty: 1 Easy Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 29) Boards of directors use outsiders to critique their strategy. This is necessary mostly to improve A) financial returns. B) organizational hierarchy. C) perceptual acuity. D) employee relations. Answer: C Explanation: To improve perpetual acuity, two companies ask outsiders to critique strategy during their board strategy sessions. Such input typically leads to spirited discussions that provide valued input on the hinge assumptions and options that are under consideration. Once, the focus was on pinpointing the risk inherent in a certain strategy. Now, discussions have led to finding that the company was missing a valuable opportunity. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 30) When the management frame of reference gets out of touch with the realities of the actual business situation, what can happen to the firm? A) Management perceptual acuity improves. B) Management gets across-the-board raises. C) The company business strategy no longer works. D) It becomes easier to maintain competitive advantage. Answer: C Explanation: A company strategy may be good at one point in time, but it may go astray when the management frame of reference gets out of touch with the realities of the actual business situation. This situation results when management assumptions, premises, or beliefs are incorrect or when internal inconsistencies among them render the overall theory of the business invalid. Difficulty: 3 Hard Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 31) Corporate retreats do not A) permit companies to discuss larger marketplace trends. B) guarantee positive consumer response to new products. C) give companies an opportunity to look beyond their own industries. D) oblige management to automatically change strategy. Answer: B Explanation: According to Ram Charan, an adviser to many Fortune 500 CEOs, improving perceptual acuity is an advantage that one CEO finds from getting together with his critical people for half a day every eight weeks to discuss what is new and what is going on in the world. The setting is informal, and outsiders often attend. The participants look beyond the lens of their industry because some trends that affect one industry may impact others later on. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 32) Why must successful managers recognize opportunities and threats in their company external environment? A) If they miscalculate the market, opportunities will be lost. B) If they misread the market, they are likely to become rich. C) If they identify all of the environmental threats, they are guaranteed to acquire large market share. D) If they identify all of the environmental opportunities, they are guaranteed to acquire large market share. Answer: A Explanation: Successful managers must recognize opportunities and threats in their company external environment. They must be aware of what is going on outside their company. If they focus exclusively on the efficiency of internal operations, the firm may degenerate into the most efficient producer of buggy whips, typewriters, or carbon paper. But if they miscalculate the market, opportunities will be lost. Difficulty: 3 Hard Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 33) The tenure of Ms. Marchionni as CEO of Lands' End was largely a result of her efforts to reinvent the apparel brand, A) resulting in an alignment with the company culture. B) resulting in an alignment with the customer base interests. C) resulting in conflicts with the customer base and the corporate culture. D) resulting in an alignment with the wholesome style brand of the company. Answer: C Explanation: One could attribute much of the failure of the tenure of Ms. Marchionni as CEO at Lands' End to her efforts to re-invent the apparel brand in a way that was in conflict with both its customer base as well as the family culture of the firm and wholesome style-as we discussed in in the opening case in Chapter 1. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-01 The importance of developing forecasts of the business environment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 34) ________ tracks the evolution of environmental trends, sequences of events, or streams of activities. A) Environmental scanning B) Environmental monitoring C) Environmental surveying D) Competitive intelligence Answer: B Explanation: Environmental monitoring tracks the evolution of environmental trends, sequences of events, or streams of activities. Monitoring enables firms to evaluate how dramatically environmental trends are changing the competitive landscape. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-02 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 35) Companies that are able to spot key trends in the environment know their business and most importantly know their A) suppliers. B) employees. C) customers. D) competitors. Answer: C Explanation: Experts agree that spotting key trends requires a combination of knowing your business and your customer as well as keeping an eye on what's happening around you. Such a big-picture/small-picture view enables you to better identify the emerging trends that will affect your business. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-02 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 36) Scanning the general environment would identify information on A) substitute goods. B) customer and firm bargaining power. C) the aging population and ethnic shifts. D) competitive rivalry. Answer: C Explanation: Environmental scanning involves surveillance of the external environment of a firm to predict environmental changes and detect changes already under way. This alerts the organization to critical trends and events before changes develop a discernible pattern and before competitors recognize them. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-02 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 37) Which of the following is not an example of corporate competitive intelligence? A) banks tracking home loans B) airlines changing hundreds of fares daily in response to competitor tactics C) consumers comparing product offers online D) car manufacturers offering sales incentives based on rival offers Answer: C Explanation: Corporate competitive intelligence is the activity of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitor strengths and weaknesses in order to avoid surprises by anticipating competitor moves and decreasing response time. Difficulty: 2 Medium Topic: Understanding a Firm's External Environment Learning Objective: 02-02 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation